Understanding the 2018 Medicare Part D Coverage Gap or Donut Hole

The Donut Hole or Coverage Gap is a
term used to describe a gap or pause in your Medicare Part D prescription drug plan
or Medicare Advantage plan coverage where, prior to 2011, you were 100% responsible for the cost of your prescription drugs -
unless your Medicare plan provided some brand-name or generic
drug coverage through the Donut Hole.

However, starting in 2011, Medicare Part D prescription drug
plans and the pharmaceutical drug manufacturers began to share a portion of your
medication expenses while you are in the Donut Hole (giving you what we now call the Donut Hole discount). So if you reach the Donut Hole, you are no longer responsible for paying 100% of the retail drug price, and instead, you pay a discounted price.

The Donut Hole is actually the third part or phase
of your Medicare Part D prescription drug coverage and you only reach
this phase when your drug spending exceeds a certain point.

Will you enter the 2018 Donut Hole?

If your formulary medications have a total retail value of over $3,750 or
you have retail drug costs of over $313 per month, you will enter the
2018 Donut Hole and receive a discount on your Medicare Part D
prescriptions - not what you spend, but the actual retail value of the medications you use. (If you are receiving Medicare Part D Extra Help, you never have a Donut Hole in your coverage.) Read more in our article: Will I enter the 2018 Medicare Part D Coverage Gap or Donut Hole?

What happens if you enter the Donut Hole?

If you enter the Donut Hole, you will receive a discount on all generic and brand-name formulary drugs that you purchase. And here are the discounts:

And this means: You will save more money on generic
medications in the 2018 Coverage Gap. As an example, if you reach the
2018 Donut Hole phase of your Medicare Part D plan, and your generic
medication has a retail cost of $100, you will pay $44. In this
example, the $44 that you spend will count toward your out-of-pocket spending limit or TrOOP.

The 2018 Donut Hole discount for brand-name drugs will increase to 65%
and you will receive credit for 85% of the retail drug cost toward
meeting your 2018 total out-of-pocket maximum (TrOOP) or Donut Hole exit
point (the 35% you spend plus the 50% drug manufacturer discount).

And this means: You will have additional savings on brand-name
drugs in the 2018 Coverage Gap. For example, if you reach the 2018
Donut Hole and purchase a brand-name medication with a retail cost of
$100, you will pay $35 for the medication, and receive $85 credit toward
meeting your 2018 out-of-pocket spending limit – or Donut Hole exit
point. The 2018 TrOOP limit or Donut Hole exit point is $5,000.

A quick review of how the Donut Hole fits into your Medicare Part D coverage

As a reminder, your Medicare Part D plan coverage has four separate parts or phases. However, if your Medicare Part D plan has a $0 initial deductible, you will skip the first or deductible phase and begin coverage directly in the Initial Coverage Phase.

(Part 1 of your drug coverage)
The Initial Deductible Phase (unless your plan has a $0 deductible and you skip directly to the Initial Coverage Phase): If your Medicare Part D plan has an Initial Deductible, you will usually pay 100% for your medications and the amount you pay will count toward the Donut Hole. However, some Medicare Part D prescription drug plans with an Initial Deductible are now covering some lower-costing medications in the Initial Deductible. So, whether you or your plan pays for your medications in the Initial Deductible, the retail value of your medications counts toward your Initial Coverage Limit (see next section) and determines when you enter into the Donut Hole or Coverage Gap.

The standard Initial Deductible can change each year. In 2018, the Initial Deductible is $405. In 2017, the Initial Deductible was $400. In 2016, the Initial Deductible was $360.

(Part 2 of your drug coverage)
The Initial Coverage Phase: After the Initial Deductible (if any), you will continue into your Initial Coverage Phase where your Medicare Part D plan covers a portion of your prescription costs and you pay some cost-sharing (co-payment or co-insurance). You will leave your Initial Coverage Phase and enter the Donut Hole or Coverage Gap when your retail medication costs reach a certain amount (not the amount of what you paid for your drugs, but the retail value of the medications you purchased - for instance, if you buy a medication with a retail value of $100 for a $30 co-payment, the $100 retail value counts toward your Initial Coverage Limit).

The Initial Coverage Limit can change each year. In 2018, the Initial Coverage Limit or Donut Hole entry point begins when your retail drug costs exceed $3,750 - in 2017, the Initial Coverage Limit or Donut Hole entry point is when retail drug costs exceed $3,700 - in 2016, the Initial Coverage Limit or Donut Hole entry point is when retail drug costs exceeded $3,310 - in 2015, the Donut Hole entry point began when retail drug costs exceeded $2,960.

Bottom Line: If the retail cost of your medications is over $313 per month, you will enter the 2018 Donut Hole.

A note on using high-cost medications:
If you use a single medication with a retail cost of over $3,750, you will enter the Donut Hole with your first purchase. If you use an expensive medication on an infrequent basis, youmay find that one large drug purchase (or multiple drug purchases in a single month) can actually move you from the Initial Coverage Phase (or Initial Deductible) into the Donut Hole, so the only way to know exactly when you will enter or leave the doughnut hole is by watching your monthly Medicare Part D plan's Explanation of Benefits statement carefully (you received this printed form in the mail) or you can contact your Medicare Part D plan and ask the Member Services representative where you are relative to the plan's Coverage Gap.

(Part 3 of your drug coverage)
The Coverage Gap or Donut Hole: As mentioned, this is the portion of your Medicare Part D coverage where you pay a larger percentage of the retail drug cost. From 2006 through 2010, you were responsible for 100% of your drug costs, unless your Medicare plan included some Donut Hole coverage. Since 2011, you receive some discount on your Medicare Part D plan purchases while in the Donut Hole.

The 2018 Donut Hole discount is 65% for brand-name drugs (you pay 35%) and 56% for generic drugs (you pay 44%). For more information about the Donut Hole discount, you can click here to see how the Donut Hole discount increases over the next few years until, in 2020, the discount reaches 75% and the Donut Hole is considered “closed”.

(Part 4 of your drug coverage)
The Catastrophic Coverage Phase: You will stay in the Coverage Gap or Donut Hole phase until your out-of-pocket costs (also called TrOOP or total drug spend) reaches a certain level. The TrOOP level in 2018 is $5,000. So if you have spent $5,000 on Medicare Part D drugs (not including monthly Medicare plan premiums), you will exit the Donut Hole and enter the Catastrophic Coverage phase.

TrOOP is the total of what you pay during the Initial Deductible (if you have one) plus what you personally pay in the Initial Coverage Phase, before the Donut Hole, plus what you pay in the Donut Hole (and plus you get credit for the 50% brand-name discount paid by the drug manufacturer in the donut hole - for instance, if in the 2018 Donut Hole you buy a brand-name drug with a $100 retail value, you pay the $35 discounted price, but actually get credit for $85 toward meeting your TrOOP limit).

Your TrOOP limit can change every year: the TrOOP limit in 2015 was $4,700 - TrOOP in 2016 was $4,850 - TrOOP in 2017 was $4,950.

A note on TrOOP vs. Retail Cost: Without considering your Donut Hole discount, your 2018 TrOOP (true or total out-of-pocket costs) should equate to about $7,809 in retail drug costs. But with the Donut Hole discount, Medicare estimates that your retail drug cost should be around $8,418 before exiting the 2018 Donut Hole. The estimate is based on historic brand-name and generic drug purchases while in the Donut Hole.

Once you enter the 2018 Catastrophic Coverage portion of your Medicare Part D plan, you pay the greater of 5% or $3.35 for generic drugs (or preferred drug that is a multi-source drug) or the greater of 5% or $8.35 for all other drugs (such as brand-name medications).

For example, if you purchase a brand-name medication in the 2018 Catastrophic Coverage phase that has a retail cost of $100, you will pay $8.35 (since this fixed cost of $8.35 is higher than $5.00 ($100 * 5%).

Reminder: No matter where you are at the end of the plan year, your Medicare Part D plan coverage ends on December 31st and the whole process begins again on January 1st of the next year.

Here is how example formulary drug purchases are calculated throughout your 2018 Medicare Part D plan (using the CMS defined standard benefit Medicare Part D plan as a guide).

When you purchase a formulary medication
with a $100 retail cost in 2018

Retail Cost

You Pay

Medicare Plan Pays

Pharma Mfgr Pays

Gov. Pays

Amount toward your TrOOP

Initial Deductible

$100

$100

$0

$0

$0

$100

Initial Coverage Phase *

$100

$25

$75

$0

$0

$25

Coverage Gap - brand-name **

$100

$35

$15

$50

$0

$85

Coverage Gap - generic ***

$100

$44

$56

$0

$0

$44

Catastrophic Coverage (brand drug) ****

$100

$10

$30

$0

$60

n/a

Catastrophic Coverage (generic drug) ****

$100

$5

$15

$0

$80

n/a

* 25% co-pay or cost-sharing
** 65% Brand-name Discount
*** 56% Generic Discount
**** you pay 5% of retail or $8.35 for brand drugs whatever is higher or
5% of retail or $3.35 for generic or multi-source drugs whatever is
higher (80% paid by Medicare, 15% paid by Medicare plan, and around 5% by plan member)
A bit of Coverage Gap history: The Donut Hole 2006 to 2010

Before 2011, the Medicare Part D Coverage Gap or Donut Hole was actually similar to a second deductible in an insurance policy where, after receiving a certain level of coverage, you were, once again, responsible for paying your own drug coverage until you reached the Catastrophic Coverage portion of your Medicare Part D plan or Medicare Advantage plan that included drug coverage (MAPD).

However, with the introduction of the Donut Hole discount in 2011, you are now responsible for only a portion of your own drug coverage in the Donut Hole.
A view into the future and the closing of the Donut Hole

In 2020, the Coverage Gap will be considered "closed" when both generic and brand-name drugs will cost Medicare Part D plan members 25% of the retail drug price (so you will pay $250 for a medication with a $1,000 retail cost) until reaching Catastrophic Coverage.

*Update 02/12/18:
President
Trump signed the Bipartisan Budget Act of 2018 (Pub.L. 115-123) on Friday, February 9, 2018
that effectively "closes" the Coverage Gap for brand-name drugs, with the brand-name Donut
Hole discount increasing to 75% in 2019. The Coverage Gap for generic drugs will not "close" until 2020.

Help with planning for your 2018 Donut Hole

To help you visualize the phases of your Medicare Part D prescription drug plan coverage, we have a Donut Hole Calculator or 2018 PDP-Planner online illustrating the changes in your monthly estimated costs based on the established 2018 standard Medicare Part D plan limits mentioned above.

We also have several examples online to help you get started with our 2018 PDP-Planner tool. You can click here for an example of a Medicare beneficiary with relatively high monthly prescription drug costs (retail prescription drug cost of $800 per month) and then change the monthly drug cost to whatever you wish.

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